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URL: http://www.bailii.org/uk/cases/UKSPC/2004/SPC00444.html
Cite as: [2004] UKSC SPC444, [2004] UKSC SPC00444

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Seymour & Ors v Inland Revenue [2004] UKSC SPC00444 (11 November 2004)

SPC00444

Business property relief for inheritance tax purposes – Whether the whole or Ragley Hall qualified notwithstanding part of the interior in private occupation – Section 110 – Meaning of asset – Building wholly or mainly used for business – No provision for apportionment – Exterior wholly used for business – Single asset – Appeal allowed

THE SPECIAL COMMISSIONERS

THE MOST HONOURABLE HENRY JOCELYN SEYMOUR

NINTH MARQUESS OF HERTFORD

HUGH ROBERT MYDDLETON

DOUGLAS ANDREW MONTAGU SCOTT

JEREMY JAMES RUSSELL

(AS EXECUTORS OF THE MOST HONOURABLE

HUGH EDWARD CONWAY SEYMOUR EIGHT

MARQUESS OF HERTFORD (DECD) Appellants

- and -

THE COMMISSIONERS OF INLAND REVENUE Respondents

Special Commissioner: JUDITH POWELL

Sitting in London on 7 September 2004

William Massey QC, instructed by Russell & Co Solicitors, for the Appellant

Peter Twiddy, Assistant Director, Capital Taxes Office, for the Respondents

DECISION

The Appeal

Mr William Massey QC appeared for the Appellants and Mr Peter Twiddy Director, Capital Taxes Office of the Inland Revenue, appeared for the Respondent.

The Appellants are the executors of the Eighth Marquess of Hertford who died on 22 December 1997. They appeal against a determination of the Respondent dated 28 July 2003. The Appellants made the appeal in a letter dated 13 August 2003.

This appeal concerns the extent to which business property relief from inheritance tax is available in respect of a chargeable transfer of value that was made by the Eighth Marquess during his lifetime on 18 November 1991. That transfer was made within seven years of his death and, whilst it was at the time it was made, a potentially exempt transfer, the death of the Eighth Marquess within seven years of that time caused it to become a chargeable transfer.

Agreed Facts and Issues

There was produced an agreed statement of facts and issues.

On 18 November 1991 the Eighth Marquess transferred by way of gift to his son (now the Ninth Marquess) a business of opening an historic house to the public. This business was referred to as the "Ragley Hall Opening". This gift was made by various Deeds of Gift of which one dealt with the transfer of land and buildings known as Ragley Hall, another with the contents of the house and a third with the goodwill of the Ragley House Opening business, copyright in the catalogues/brochures, book debts, cash in hand and at bank, benefit of contracts motor vehicles foodstuffs beverages and all other chattels used in the business and not already given.

Ragley Hall is a historic Grade I listed house and prior to the transfer to the Ninth Marquess the freehold was vested in the Eighth Marquess. Both before and after the transfer the same parts of the interior of Ragley Hall were and the same parts were not open to the public.

The value transferred by the 1991 transfer of value was, to the extent that it was attributable to the business of the Eighth Marquess, eligible for business property relief from Inheritance Tax under section 104 Inheritance Tax Act 1984 ("IHTA"). The value transferred to that extent fell to be treated as reduced by 100% as a consequence of the effect of section 104 and section 105(1)(a). It was common ground that:-

(a) The Eighth Marquess had owned the business for at least two years prior to the transfer in 1991 so that the required period of ownership before business property relief is available in respect of any transfer of business property (section 106 IHTA) was satisfied.

(b) The Ninth Marquess carried on the business from and after the transfer until the death of the Eighth Marquess as required for business property relief to be available (section 113A(3).

(c) Whilst the exterior was accessible to the public to view as a whole only a part consisting by volume of some 78% was open to the public. Part of the interior consisting by volume of 22% was not open to the public. It was occupied by the Eighth Marquess and the Ninth Marquess (then the Earl of Yarmouth) and their families as their living quarters prior to the gift and part was let at a rent of Ten thousand pounds per annum to the Eighth Marquess after the gift.

The Appellants contend that so far as the value transferred by the transfer of value in 1991 was attributable to the value of the freehold of Ragley Hall, the value transferred is eligible for 100% relief under section 104.

The Respondent contends that, so far as that value is attributable to 78% of the value of Ragley Hall, the value transferred is eligible for 100% relief but that so far as it is attributable to 22% of the value of the freehold, it is ineligible for relief.

It was agreed that the issue is whether, where the whole of the exterior of the single building is open for viewing by the public in the course of the house opening business, but only parts of the interior of the house are open to the public and parts are not so used does section 110 apply: -

(i) As the Respondents contend, in such a way that the building as a whole is not one of the "assets used in the business" and only that part of the building used by the owner for the purposes of his business is one of the assets used in the business :or

(ii) As the Appellants contend, in such a way that the building as a whole is one of the assets used in the business, and its value is an ingredient of the "net value of [the] business" within section 110(b) (unless its use is such that it is an "excepted asset" within section 112 which it is agreed is not the case here).

It was also agreed that, if the Respondent's contention is correct, 78% of the value transferred in 1991 and attributable to Ragley Hall will be reduced to nil under section 104 and, if the Appellants are correct, 100% of that value will be reduced to nil by that section.

There was no oral evidence and there is no dispute about the facts. The principal issue is the application of section 110 IHTA to the agreed facts.

The relevant Legislation

The relevant provisions of IHTA (in the form that they were in at the time of the 1991 transfer) are as follows.

Section 104 -

(1) where the whole or part of the value transferred by a transfer of value is attributable to the value of any relevant business property, the whole or that part of the value transferred shall be treated as reduced-
(2) in the case of property falling within section 105(1)(a)[(b) or (bb)] below, by 50 per cent

(Although the stated relief at the time of the 1991 transfer was 50 per cent, it was increased to 100 per cent by F (No 2) A 1992, Schedule 14. The change had effect in relation to potentially exempt transfers made before 10 March 1992 that proved to be chargeable as a result of a death occurring on or after that date.)

Section 105 -

(1) Subject to the following provisions of this section, and to sections 106, 108 [..], 112(3) and 113 below, in this Chapter "relevant business property" means, in relation to any transfer of value;

(2) property consisting of a business or interest in a business

Section 110 -

For the purposes of this Chapter –

(a) the value of a business or of an interest in a business shall be taken to be its net value;

(b) the net value of a business is the value of the assets used in the business (including goodwill) reduced by the aggregate amount of any liabilities incurred for the purposes of the business;

(c) in ascertaining the net value of an interest in a business, no regard shall be had to assets or liabilities other than those by reference to which the net value of the entire business would fall to be ascertained

Section 112 -

(1) In determining for the purposes of this Chapter what part of the value transferred by a transfer of value is attributable to the value of any relevant business property so much of the last mentioned value as is attributable to any excepted assets within the meaning of subsection (2) below shall be left out of account

(2) An asset is an excepted asset in relation to any relevant business property if it was neither –

(a) used wholly or mainly for the purpose of the business concerned throughout the whole or the last two years of the relevant period as defined in subsection (5) below, nor

(b) required at the time of the transfer for future use for those purposes

(4) Where part but not the whole of any land or building is used exclusively for the purposes of any business and the land or building would, but for this subsection, be an excepted asset or, as the case may be, prevented by subsection (3) above from being relevant business property, the part so used and the remainder shall for the purposes of this section be treated as separate assets and the value of the part so used shall (if it would otherwise be less) be taken to be such proportion of the whole as may be just

The documents of transfer and other documents

The agreed bundle of documents included copies of the deed of gift made in 1991 and of the lease back made on the same day. The deed of gift was a very simple document and the subject matter of the gift was described as follows:

"ALL THAT piece or parcel of land situate in the Parish of Arrow in the County of Warwick TOGETHER WITH the house gardens stables and outbuildings known as Ragley Hall containing an area of Nine decimal point nine zero five hectares as the same is for identification only shown edged red on the Plan annexed hereto and more particularly described below:-" (and there followed a reference to the relevant Ordnance survey number details)

The subject matter of the lease back was "the North Flat" which it is agreed forms a part of the 22 per cent of Ragley Hall - the value of which the Respondent says does not qualify for business property relief. The Appellants accept that the value of the lease was an asset of the estate of the Eighth Marquess at the time of his death. It is agreed that the parts of Ragley Hall not used in the business were the same both before and after the gift in 1991.

Also included in the bundle of documents is the gift of the goodwill attaching to the business. This included, in addition to the goodwill, copyright, debts due, cash in hand and at bank, contracts, motor vehicles and all other chattels used in the business and not otherwise given by the Eighth Marquess to his son. Other documents included in the bundle are not relevant to the issue in this case. They related to gifts made on the same day of chattels and of jewellery.

Plans included in the agreed bundle showed the interior of Ragley Hall and identified those areas that were, and those areas that were not, on display to the public. It is agreed that the areas not on display amount to 22 per cent by volume of the building. These areas are the attics (containing staff bedrooms), the side of the building used by the Ninth Marquess and the side which was used by the Eighth Marquess and which was, from the time of the 1991 transfer, the subject of the lease back to him. The exterior of the building is unaffected visually as a consequence of its occupation by members of the family.

Financial Statements for the business were produced. In the notes to the Financial Statements for the year ended 31 December 1989 on page 10, in the section entitled "Fixed Assets", contain the statement that "The Hall exhibits and other chattels are not shown in the balance sheet". The same statement appears in the Notes to all the Statements that we were shown for the years up until the year ended 31 December 1997. The only variation in these references to the Hall in these annual Statements appears in the one prepared to 31 December 1995. In the Accountant's Report to that Statement, the comment was made that "In preparing the accounts, no depreciation has been provided in respect of those parts of the Hall used in the Opening to the Public trade". This is the only reference (at least in the Statements shown to me) to the fact that only parts of the Hall were used in the trade.

The leaflet advertising the Ragley Hall was also in the agreed bundle together with a print out of the web site page entitled "Welcome to Ragley". The leaflet referred in the section entitled "The experience of history" to "Ragley Hall " which was described as "the family home of the 9^th Marquess and Marchioness of Hertford, seat of the Conway-Seymour Family. Designed in 1680 by Robert Hooke, inventive genius, friend of Sir Christopher Wren and rival of Sir Isaac Newton, Ragley is one of the earliest and loveliest of England's Palladian Houses. The perfect symmetry of the architecture of Ragley remains unchanged save for the spectacular portico by Wyatt added in 1780." The leaflet goes on to describe the particular features to be visited including some parts of the interior of the Hall, the Gardens, Stables Woodland Walk and Lake. The opening times were set out in the leaflet and Admission prices given for the House, Park and Gardens and, separately, for the Park and Gardens alone. The web site extract contained similar information.

Authorities referred to in the judgement

Finch v IRC (1985) Ch 1 ("Finch").

IRC v Mallender [2001] STC 514 ("Mallender").

Farmer and another (Executors of Farmer deceased) v IRC [1999] STC (SCD) 321 ("Farmer").

Inland Revenue Commissioners v George and another (executors of Stedman, deceased) [2003] EWCA Civ 1763 [2004] STC 147 ("Stedman").

Submissions

The submissions for the Appellants were contained in a skeleton argument produced to me and I was taken through them in further detail by Mr Massey.

The Main Submission

The main submission for the Appellant was that where an asset is used mainly (though not wholly) for the purposes of a business its value is treated as reduced by 100%, there being no provision for apportionment in the legislation. The lack of any statutory provision for apportionment is in contrast to other types of capital tax relief where relief is apportioned according to business/non-business use. Reference was made, by way of example, to sections 115(5) Capital Gains Tax Act 1979 and section 152(6) Taxation of Chargeable Gains Act 1992 and SceduleA1 paragraph 9 Taxation of Chargeable Gains Act 1992.

In contrast Mr Twiddy for the Respondents says that it is incorrect to start from the premise that the whole physical entity, Ragley Hall, is an asset used in the business when it is a fact that physically the whole was not so used. It is relevant that, immediately before the death of the Eighth Marquess, a part of the hall was subject to a lease in his favour. If business property relief is to be available in the case of a lifetime transfer which becomes chargeable as a result of the transferor's death, the business property relief conditions must be satisfied at the time of the transfer and, again, as if there had been a transfer of value by the transferee immediately before the death. (Section 113A(3) IHTA). It is only when the conditions are satisfied at both times that relief is available. The Respondents submitted that, at the time of the death of the Eighth Marquess a part of the Hall could not be used without his consent as lessee and he was not connected with the business. The business was then being conducted by the Ninth Marquess (then Lord Yarmouth). The Respondents submission is that the areas to which the public had access under licence or contract for a particular purpose are the areas that constitute the asset of the business within the meaning of that term for the purposes of section 110 IHTA.

Mr Massey referred me to the cases of Farmer and Stedman in support of the general proposition that the parts of IHTA dealing with business property relief relies upon the concept of "wholly or mainly" in relation to business property. In Farmer, the question was whether the deceased, who carried on the business of farming and of letting properties on the farm as a single business was, as the Revenue contended a business consisting wholly or mainly of making investments and was therefore not relevant business property qualifying for relief. In allowing the appeal, Dr Brice held that it did not follow from the definition of business in section 103(3) IHTA that the level of net profit was the only, or principal, test for determining whether the business consisted of making or holding investments. She held that section 105 was concerned with what the business consisted of and it was necessary to look at the business and its activities in the round and to consider all relevant factors. In that case the letting of properties was subsidiary to the main function of the estate which was its use as a farm. In Stedman, the Court of Appeal decided, restoring the decision of the Special Commissioner, that a caravan park business did qualify for business property relief and that the holding of property as an investment was only one component of the business and it was not the only component. Carnwarth LJ said, at page 149, and after noting the varying conclusions of the Special Commissioners in relation to such businesses, "one consequence of the relative imprecision of the statutory test is that the right to business property relief may depend on fine distinctions between businesses, which to their owners, and for most practical and economic purposes, are virtually identical."

I did not find either of these cases particularly helpful to the issue in this case since it was not argued that the business run first by the Eighth Marquess and then by the Ninth Marquess was a business of making or holding investments. However, I did find that the observation of Carnworth LJ was comforting in its confirmation of the difficulties faced in this type of case.

The Respondent, in answering the argument concerning the words "wholly or mainly" says that this is a concept used only in section 112 which is not relevant to this case and section 110 which is relevant to this case does not use this concept. The answer is to be found in considering what is the asset for the purposes of section 110 and the answer is that the asset is the ground and first floors of Ragley Hall. I agree that section 112 is not directly relevant to this case since it is agreed that there are no excepted assets involved and section 112 deal with excepted assets. However, Mr Massey explained the significance of section 112 and I deal with this below.

The case of Finch was cited by Mr Twiddy and by Mr Massey who found in it supports for their opposing views. Mr Massey also cited the case of Mallender. Both cases involved sole traders and both cases dealt with the interpretation of a provision which became section 110(b).

The case of Finch concerned tax payable by a deceased who had been a sole trader before his death. He had carried on a farming business on land owned by trustees of a settlement and the deceased was life tenant. The trustees claimed that the land used by the deceased for the purposes of his business was relevant business property that was then defined in paragraph 2 of Schedule 10 to the Finance Act 1976. The Revenue rejected this claim. The trustees appealed contending that paragraph 14(2) of Schedule 4 Finance Act 1975 (in accordance with which the value of a business had to be determined for the purposes of Schedule 10) referred to the net value of a business as the value of "assets used in the business". The land was treated as forming part of his estate since he had an interest in possession in it and was, therefore treated as beneficially entitled to it for the purposes of IHT. The land used by the deceased was an asset used in his business and since its value formed part of the value transferred on his death it fell within the definition of relevant business property. Paragraph 14(2) in so far as material provided as follows:

"For the purposes of this paragraph the net value of a business is the value of the assets used in that business (including goodwill) reduced by the aggregate amount of any liabilities incurred for the purposes of the business…….."

The wording of that sub paragraph is substantially the same as the wording of section 110(b).

In allowing the trustees' appeal against the decision of Vinelott J. that the land was not relevant business property Oliver LJ said as follows:

"Now, in the case of a partnership, there is not generally very much difficulty in ascertaining what the partnership assets are, for this will be apparent from the accounts, but in the case of a sole trader who may have been carrying on business from his private residence and employing in it property which is not segregated from his other property, there may be considerable difficulty in ascertaining what is and what is not part of "the business……………" That it seems to me accounts for the form taken by the first limb of paragraph 14(2) where we are told how the net value to which the tax attributable is to be ascertained. The first part of that paragraph is directed, in my judgement, to the case of the decedent who is a sole trader and where what has to be ascertained is not the net value of some interest less than the whole but the value of "the business". In such a case there is no such thing as an asset "of" the business. All the assets of the estate, to the value of which the tax is attributable are assets "of" the decedent and in order to identify which of the decedent's assets can be taken into account in assessing the value of the business the legislature adopts the only practicable test – were they assets which were "used in the business"? – it being, as the judge pointed out, necessarily postulated that the assets are assets, the value of which forms part of the value transferred and therefore which belong to the decedent. Thus the assets and liabilities referred to in the sub paragraph are not at this stage identified as assets or liabilities "of" the business. They are simply assets the value of which is included in the transfer of value and are to be identified as business assets for the purposes of the ascertainment of the net value by reference to whether they were used by the deceased in his business just as those of the deceased's liabilities which are to be allowed as a deduction are to be ascertained by asking whether they were incurred by him for the purposes of his business."

Mr Massey argued that Finch is not authority for deciding the question whether land or buildings comprise one asset or more than one asset. In that case he accepted that there was some 5,500 acres of land and business property relief was claimed for 257 acres of that land but it is not clear whether all the land was contiguous and this was not in issue. I agree with this argument.

Mr Massey drew particular attention to what was said in the High Court and later reversed in the Court of Appeal. In the High Court, Vinelott J said "In my judgement, therefore, the words "assets used in the business" should be construed as meaning "assets "of" the business which are used in the business" but Oliver LJ said in the Court of Appeal that "the legislature adopts the only practicable test – were they assets which were "used in the business"? He reached that conclusion about the meaning of what is now section 110(b) for the reason that in the case of a sole trader there is strictly no such thing as an asset "of" the business". Mr Massey says that the Hall was an asset and that it was mainly used in the business and it qualified for relief since there is no provision for apportionment. This view is, he said also supported by Mallender. Mallender was decided after Finch. The issue was whether property that was offered as security for a bank guarantee given in connection with the deceased's Lloyd's underwriting business was "used in the business" and the High Court decided it was not. Jacob J held, applying dictum of Oliver LJ in the Court of Appeal in Finch that what was used in the business was the guarantee and only the guarantee. Jacob J at 521 said that "Under s. 110(b) "net value" is the "value of the assets used in the business [emphasis added]" (less liabilities). Those assets are the same thing as the "property consisting of a business" (the section 105(a) definition). This was decided by the Court of Appeal Self evidently, says Mr Tidmarsh, neither the land nor the reversion are "used in" the business of underwriting. All that is used in the business is the guarantee."

Mr Twiddy for the Respondents says on the other hand that Finch supports the view that section 110 is merely a provision dealing with valuation and should be regarded as using commercial rather than technical concepts. He accepted that this his involves a "leap of terminology" which is "messy" but said in support of this view that there were a number of curious concepts in this area; for example the notion that a life interest is a form of asset. I do not think that the life interest was regarded as an asset in the case of Finch. I think that this is clear from a passage from the decision of Oliver LJ to which Mr Twiddy directed us. At page 270 Lord Oliver says as follows:

"If one asks "of what property did the deceased's business consist immediately prior to his death" the answer must, I think, be at least that it included whatever interest he had in fact in the land, buildings and cultivation on, in and with which it was carried on"